Tax burden comparison in Baltics: Latvia remains in the lead

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Although the massive tax reform has brought about considerable innovations in tax legislation, Latvia remains the country with the highest labour force tax burden among Baltic States, as concluded in a comparison performed by Swedbank’s Institute for Finances.

Latvia’s tax policy is neither employer nor employee friendly, as it creates the highest costs per worker among Baltic States.

What will 2018 bring taxpayers in Baltics?

Swedbank analysts say that 2018 has brought many changes to Latvia’s legislation. Because of that, employers and employees have a lot to ponder. In an attempt to reduce social inequality, minimum wages have been increased (from EUR 380 to EUR 430), non-taxable minimum application and calculation principle (from EUR 60 to EUR 115 last year and from 0 to 200 euros this year). This year has also seen introduction of a progressive PIT rate (from 23% to 20%, 23% or 31.4% depending on income). In accordance with changes brought about by the reform, benefits for dependents have been increased (from 175 euros to 200 euros), as have rates for state social insurance fees (from 10.5% to 11% for employees and from 23.59% to 24.09% for employers).

Tax changes have been noticed in Latvia’s neighbouring countries – Lithuania and Estonia. Compared with Latvia, similarly large changes have been registered in Estonia, whereas changed in Lithuania have been more moderate. For example, minimal wage in Lithuania has been increased by 20 euros (from 380 to 400 euros), whereas in Estonia the increase was 30 euros (from 470 euros to 500 euros). More considerable changes in Estonia are associated with a major increase of non-taxable minimum from 180 euros to 500 euros. Similarly to Latvia and Lithuania, it is differentiated based on income. In Lithuania, non-taxable minimum amount has grown and its maximum amount reaches 380 euros a month instead of 310 euros.

«Although the goal of Latvia’s tax policy is reducing the tax burden for lower income recipients, other Baltic States are moving towards more rapid steps. For example, the non-taxable minimum applied in Lithuania is nearly twice as large as Latvia’s. The minimum in Estonia is two and a half times larger,» says Swedbank Institute for Finances expert Evija Kropa.

She also adds that unlike Latvia, PIT rates in neighbouring countries were not changed in recent years, and they remain lower than Latvia’s – 15% in Lithuania and 20% in Estonia.

Labour force tax burden – the highest for people in Latvia

According to the tax burden comparison with Baltic States, Latvia remains in the lead among Baltic States with the highest labour tax. The only advantage Latvian employees have over their Lithuanian neighbours is the situation with registered dependents. This, however, is a volatile result, because Lithuania lifted the benefit for dependents in 2018. Instead, the country introduced a separate EUR 30 benefit for every child under the age of 18.

«This way Lithuania ensured in principle that families with relatively low income are provided with benefits for dependents in cases when wages are below the entire benefit amount (with a wage of EUR 400 and non-taxable minimum of EUR 380, it was not possible to use benefits for dependents worth EUR 200). From 1 March onward, families in Latvia will be given an additional amount if they have at least 2 children under the age of 18. However, the amount is still below that of Lithuania (EUR 10 for two children and EUR 66 for three children). In Lithuania, benefits for two children reach EUR 60 and for three – EUR 90,» Kropa explains.

The most welcoming labour force tax policy in found in Estonia

Although minimal wage recipients in Latvia have experienced a major income increase this year – by 20% or EUR 58 ‘on hands’, when compared with neighbouring countries, residents in Latvia still get the smallest amount of money at the end of the month. In addition, even though minimal wage in Lithuania is below that of Latvia (EUR 400, as opposed to EUR 430), Lithuanian residents receive up to EUR 15 more on hands (EUR 361 in Lithuania as opposed to EUR 346 in Latvia). This situation formed because of higher non-taxable minimum amount and lower PIT rate. Out of the three Baltic States, the situation with low-wage recipients seems to be the best in Estonia, where minimum wage is (EUR 500) and it is not applied with income tax. After all the social payments, workers are left with EUR 482, which is EUR 136 more than in Latvia.

The expert mentions that average income (EUR 1,000 before taxes) of employees in Estonia are considerably higher than it is in Latvia and Lithuania – Estonia is ahead with an advantage of EUR 100 a month. This can be explained with considerably higher non-taxable minimum.

As for higher income (EUR 1,500 before taxes) recipients, Estonia’s labour tax policy remains the most welcoming among all three Baltic States. The country’s tax policy offers income that is more than EUR 100 larger than what Latvia can provide. Although all three Baltic States already have systems for differentiated non-taxable minimum, Estonia has a much higher wage threshold at which non-taxable minimum starts to decrease and until which it is applied (440 to 1,000 euros in Latvia and 1,200 to 2,100 euros in Estonia).

Employees cost a lot more to employers in Latvia

According to Swedbank’s labour tax burden comparison in Baltic States, employers in Latvia are not too hot about the country’s tax policy. On paper, equal income levels means a single employee in Latvia costs less than he or she does in Lithuania and Estonia. A comparison, however, reveals how much employers have to pay for a single employee with a wage of EUR 500. The price is the highest for Latvian employers (total costs around EUR 831). Costs in Lithuania are EUR 40 lower (around EUR 791). In Estonia, costs are EUR 137 lower (costs around EUR 694).